Insight & Analysis

Expecting the unexpected

Published: Nov 2020

From navigating the challenges that continue to arise from the COVID-19 pandemic, to driving other initiatives including sustainability and the transition from LIBOR, here’s what treasurers are likely to be focusing on in 2021.

A great horned owl

Twelve months ago, few could have foreseen the pandemic that would come to dominate 2020. As the year draws to a close, COVID-19 continues to bring widespread disruption to people and businesses around the world – and it is likely that this will continue well into 2021.

For corporate treasurers, the challenges of the past year have been extraordinary. Lockdown conditions have forced entire treasury teams to adopt home working models, often overnight. While some had prepared for such an eventuality – albeit with the expectation that any such disruption would be short-lived – others had to act fast to adjust their processes and secure the equipment they needed to operate from home offices. And for many, school and nursery closures meant that work had to be balanced with childcare and home learning responsibilities.

As if this wasn’t challenging enough, treasurers have also had to navigate numerous obstacles that have arisen during the course of the crisis, including securing access to liquidity, mitigating soaring cybercrime threats, managing FX in volatile conditions and addressing supply chain disruptions. Some companies, notably those in the aviation and hospitality sectors, have faced particularly severe challenges, while others have seen customer demand ramp up rapidly. As Jack Spitzer, CFO of health and wellness company Plexus Worldwide, comments: “We have had a strong surge in sales during COVID, so it has forced us to look further into how we can better handle spikes in volume from order to fulfilment to customer support.”

As 2021 approaches, treasurers are not only continuing to navigate the specific challenges brought by the pandemic itself, but are focusing on a wide range of treasury initiatives, from automating processes to exploring opportunities for sustainable financing. Matthew Davies, Head of Global Transaction Services (GTS) EMEA and Global co-Head of Corporate Sales, GTS at Bank of America notes that the challenges in the year ahead can be divided into three: “There are going to be the priorities that are a direct result of COVID-19; the priorities that are a by-product of COVID-19 – such as the macroeconomic environment – and the priorities that come under the heading of business as usual, including topics like risk management, working capital management and rationalising banking structures.”

While not exhaustive, the following are some of the areas that treasurers are expecting to focus on in the coming year.

COVID-19

Unsurprisingly, businesses are expecting further disruption in 2021 as a result of the pandemic. Carl Sharman, Director, Financial Advisory at Deloitte, says a recent CFO survey carried out by Deloitte highlights that the COVID-19 pandemic is set to have the highest negative effects to their businesses over the next 12 months, with 75% of respondents expecting either ‘significant’ or ‘severe’ impacts. “Interestingly this compared with only 23% expecting the same level of negative effect caused by Brexit,” he says. “In comparison, 72% expect the negative effects for Brexit to be at either ‘mild’ or ‘some’, which highlights a significant shift in emphasis.”

But while the challenges of COVID-19 are set to continue in 2021, it’s likely that the focus will be somewhat different. Davies notes that while 2020 was a year of adjusting to the new environment and protecting the business, the emphasis in 2021 will be on “getting back to a forward-looking view of how to position the company for the future.” He adds, “That means making sure the right architecture, processes, structures and teams are in place to deal with an environment that continues to be highly uncertain.”

In the meantime, Sharman says that treasurers are “likely to be pushed into the fast lane” next year as developments take hold, with cost reduction and increased cash flow coming into sharper focus. “It is also highly likely that reducing leverage will become critical for many businesses and sectors, with asset disposal and debt/equity restructuring playing a major role,” he says. “Already the signs are there for next year’s budgets to have increased spend in software, data and IT/automation compared to pre-pandemic plans, in many cases offset by a marked decrease in land, buildings and workspace infrastructure spending, as businesses begin to re-jig their priorities.”

Technology investment

Alongside an abrupt transition to remote working models, technology has risen rapidly up the treasury agenda. Some treasurers have accelerated their adoption of treasury management systems, fraud prevention software and cash forecasting solutions in the quest for greater visibility and control – although in other cases, technology initiatives have gone on the back burner as more pressing priorities have emerged. As Enrico Camerinelli, Senior Analyst at Aite Group, points out: “On the one hand, the pandemic has pressed the pause button – a lot of people are stopping and thinking about what comes next. But the other comment I’m hearing is that the pandemic has accelerated some decision processes that were already there.”

The current climate may also have brought a shift in focus when it comes to the type of technology investment companies are focusing on. Deloitte’s Sharman says that before the pandemic, “spend may have been focusing on the competitive advantage and development areas of machine learning, automation and predictive analytics – but now it may be more concentrated in doing the basics well in terms of remote working.”

He adds that this may “put the treasurer at the heart of the recovery”, with robust payment processes, cash visibility and heightened risk management emerging as “core business-critical candidates for being enabled by the latest technology platforms, with corporates focusing less on marginal gains and more on protecting avoidable losses.”

Mark Smith, Head of Treasury and Trade Solutions EMEA at Citi, says a major focus in recent months has been on building resilience in order to manage business disruption. “It’s about being able to run your systems and platforms, connect with clients and enable them to continue serving their customers,” he says. For corporate clients, he says the crisis has acted as “a catalyst to investment and digitisation,” and has led to greater adoption of initiatives that can automate manual processes.

In this environment, banks are seeing significant uptake of their digital services. Bank of America reported in a Q3 press release that CashPro Mobile active users have increased by 39% in the last 12 months, while the value of payments approved using CashPro Mobile has increased by 111% year on year. “Clearly clients are embracing the opportunity to do more through digital capabilities,” says Fernando Iraola, Head of GTS LatAm and Global co-Head of Corporate Sales, GTS at Bank of America. “I see this as one of the opportunities to come out of this crisis, and this will continue in 2021.”

Smith, meanwhile, says that over 75% of Citi’s account opening can be carried out using digital onboarding capabilities. “We’ve been incredibly focused on our digital onboarding, and working out how we can make doing business with us easier,” he comments. “It’s not about having reams of unnecessary legal documents, but about having the pertinent ones that are necessary, and then offering digital onboarding.” He also cites the growing take-up of API connectivity to initiate payments, check balances and send queries.

Preparing for the unexpected

Chris King

Group Treasurer at Drax Group

Drax logo

For corporate treasurers, preparing for the unexpected has never been more crucial, says Chris King, Group Treasurer at Drax Group, a British electrical power generation company which aims to enable a zero-carbon, lower cost energy future.

“The approach we adopt is to look at core strategic themes, assess how they may develop and then seek to maintain as much flexibility and optionality wherever possible to be able to respond to the broadest range of scenarios,” says King. He notes that four themes in particular stand out as he looks forward to 2021:

1. Net zero emissions

“Drax, the UK’s leading renewable generator, undertook Europe’s largest decarbonisation project and was the first company globally to announce its ambition to become carbon negative by 2030,” says King. “We will need to continue to focus on innovation, in terms of how we seek to translate that into our financing structures, our financial KPIs and approach to derivatives structuring and risk management.”

2. Brexit

King says that once Brexit is finalised, “we should get some degree of certainty, which one would hope would be accompanied by inbound investment. This may happen as a cliff edge event, or it may happen over time and with it may come some increased questioning (and uncertainty) over how the UK navigates a post-EU trade landscape.”

He adds that currency and broader economic influences are very impactful to Drax, and continue to remain a key focus. “We have been immensely innovative in the last two or three years, working to reassess and implement a novel and fundamentally different approach to derivatives execution and risk management to substantially enhance our risk adjusted return,” he says. “We have developed a number of new products with financial institutions, and this is something we will seek to optimise further.”

3. ‘Lower for longer'

Where interest rates are concerned, King says “I have been wrong on this point for longer than I care to remember, in that over the last decade I have typically thought that global interest rates would rise.”

He adds that while he still holds this opinion, he now expects this will take longer than previously thought. “That said, for many organisations, including Drax, locking in long-term financing costs at ultra-low rates provides certainty to focus on strategic objectives, unfettered by concerns of near-term rising interest rates – which in itself is valuable.”

4. Enjoyment

In addition, King muses that people have become “less connected” during the course of 2020. He adds: “I believe that life is a collection of experiences, about embracing the diversity of mindset (while acknowledging differences of opinion) and having those unexpected moments that only arise in live scenarios. These are the real visceral influences that help stimulate creativity and guide our future.” When it comes to looking back on 2021, he says, “I want to ensure the approach taken to team, colleagues, family and the person on the street has sought to do this with positivity and fun at its core.”

In summary, King says, “If we focus on flexibility and enhancing risk-adjusted return, in the long run we should be able to navigate any changes that come our way – be it in regulation, in the economic landscape or within our business – while also having fun on the journey, wherever it leads.”

LIBOR transition

Another topic facing treasurers in the coming year is the transition away from LIBOR. While the transition to LIBOR alternatives – such as the Sterling Overnight Index Average (SONIA) and the Secured Overnight Financing Rate (SOFR) for USD – is due to be completed by the end of 2021, many treasurers have yet to prepare for the switch.

“Transitioning from LIBOR is complex and will require a considerable amount of time and effort from corporates,” says Deloitte’s Sharman. “Alongside the commercial impacts of direct and indirect exposures, treasurers will need to understand the new pricing conventions in order to assess the cost of new products and identify any differences that would impact risk management strategy.”

When it comes to specifics, Sharman says that debt financing will be widely impacted, along with hedging strategies, KPIs and ratios. “Scenario modelling should enable proactive decision making and the formation and execution of a transition plan – including negotiation with bank counterparties.”

Sustainability and ESG

Meeting sustainability and ESG (Environmental, Social and Governance) objectives had been expected to be a major theme in 2020 – and despite the disruption brought by the pandemic, this has proven to be the case, not least because the shift to home working has helped accelerate the move away from paper-based processes.

Treasury Today’s 2020 Global Sustainability Study found that for 61% of respondents, sustainability is reflected in the organisation’s core values, while 81% said that their companies have a sustainability ‘champion’. That said, sustainability still represents a small portion of the overall workload where treasury is concerned. The survey found that 63% of treasury teams devote less than 10% of their time to sustainability issues – although as one respondent commented, “Sustainability issues will take up a higher portion of future activities – we are still in the early days.”

Likewise, ESG and sustainability are a major area of focus for financial institutions. Citi’s Smith says that the bank’s initiatives in this area include financing wind farms from the bank’s trade organisation, building ‘sustainable’ supply chains for financing, as well as the ‘Priceless Planet’ partnership with MasterCard to channel fee revenues from travel spend into a reforestation programme. “This also links into digital, and making sure that we can move away from paper statements, large amounts of documentation and wet signatures,” he adds. “We are really encouraged by the number of our clients embracing that, and working with us in partnership to drive it forward.”

Beyond these initiatives, Smith says there are “more exciting things to come”, including a focus on expanding the bank’s ESG investment portfolio. “We already support a lot of ESG money market fund investments, but that could potentially lead into ESG-compliant deposits that link the appropriate assets on the balance sheets into ESG assets,” he explains.

And it’s clear that corporations are looking closely at how banks are approaching this topic. BofA’s Iraola says that the bank is participating in an RFP with a global client, which has already included two stages focusing on the company’s business capabilities and technical requirements. For the third round, the company has requested a two-hour discussion about the bank’s ESG strategies and philosophies.

“They’ve already heard about ESG from a capability standpoint, but now they want to know that if they decide to work with us, they will have a partner that is completely aligned with their philosophy from an ESG perspective,” says Iraola. “We are delighted with this evolution, which shows how the ESG agenda is becoming even more relevant from a global treasurer’s perspective.”

Looking forward

The events of the past year have brought significant challenges for treasurers – but they have also prompted treasurers to accelerate process improvement and digitisation initiatives which should leave treasury teams better equipped to tackle the year ahead. And while COVID-19 is sure to continue dominating the agenda for some time to come, treasurers will have plenty of additional challenges to focus on in 2021, including LIBOR reform, the post-Brexit European trade landscape and the continuing focus on ESG and sustainability.

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